Financial expert calls for bailout

August 26, 2007 - 9:00 pm

“Fiscal, not monetary policy should be the preferred remedy,” said Gross, who manages the $103 billion Pimco Total Return Fund. “This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard-working Americans whose recent hours have become ones of frantic desperation.”

Fed interest-rate cuts won’t lighten the extra mortgage payments for homeowners as lenders may not follow with cheaper rates, he said. Lower Fed rates would likely weaken the dollar, Gross wrote in his monthly commentary on Pimco’s Web site. The unexpected 0.5 percentage point cut last week on the rate the Fed charges banks and the addition of cash to ease access to capital may provide short-term relief to markets, he said.

The Fed left its benchmark overnight interest rate at 5.25 percent at its last meeting Aug. 7.

“The fed funds rate at 5 1/4 percent is restrictive,” Gross said the same day. “The economy is slowing. They’re going to have to” cut rates in the next several months. He also said his firm has been buying high-yield assets.

U.S. homes facing foreclosure almost doubled in July to 179,599 notices as property owners with adjustable-rate mortgages saw payments rise and were unable to refinance because of the subprime crisis, RealtyTrac Inc. said. Analysts expect defaults to rise to more than 2 million, which would likely dent housing prices by 10 percent, Gross wrote.

There are precedents from previous crises in the 1990s, Gross said. The U.S. government created the Resolution Trust Corp. to rescue the insolvent savings and loans industry and the Fed organized a bailout to prevent billions in losses rippling through Wall Street after the collapse of Long-Term Capital Management LP hedge fund in 1998.

“Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2 million homeowners to the wolves in 2007?” Gross wrote. “If we can bail out Chrysler, why can’t we support the American homeowners?”

Lehman Brothers Holdings Inc., the biggest U.S. underwriter of mortgage-backed securities, expects the Fed to lower the federal funds rate by between 50 and 75 basis points from the current 5.25 percent by the end of March.

Traders see a 58 percent chance the Fed will cut its target for overnight bank lending by half a percentage point to 4.75 percent at its next meeting Sept. 18, based on futures contracts.